Up until this new year (Jan 04), I have been working on a 1099 basis with a couple of independant contractors who always had enough going on to keep me busy. I am now licensed and insured myself and have begun to get jobs on my own. I started out the year with a $35k basement remodel and am therefore doing some general contracting myself. My wife is doing a great job managing the accounting for the business and providing great job cost information, but because we are both new to the general contracting aspect of the business we have a couple of questions that I need some help with. Can anyone assist by answering directly or recommending a source for finding answers to these questions?
1. On Schedule C, where do you report subcontractors. There are only categories for:
- Contract labor
- Cost of Goods Sold – labor
- Cost of Goods Sold – material
- Cost of Goods Sold – other
2. As a GC do you split subcontractor amounts by labor versus materials or report the total number? If so, where?
3. If labor is split , then do you issue a 1099 for every subcontractor you use?
Any help here would be much appreciated
Replies
First of all there is the instruction sheet for sch C.
And the IRS has pub 334 Tax Guide for Small Business and Pub 535 Business expenses.
You can get all othose (and others) from http://www.irs.gov
I would use contract labor. But it really is not that critical how you divide stuff up at the net results is the same.
"2. As a GC do you split subcontractor amounts by labor versus materials or report the total number? If so, where?
3. If labor is split , then do you issue a 1099 for every subcontractor you use?"
I am not real clear on what you are asking here.
You have to issue a 1099-misc for anyone that you pay more than $600 a year to for services performed for the business. That would include both sub-contractors, but also attorneys and accountants. And the later would be typical list as professional fees.
And if the sub-contractor's invoice shows material separate from labor then you can split that out when figuring their 1099-misc.
BUT what I STRONGLY suggest is that you get with a local EA or CPA and rent about 2 hours of their time and discuss how to setup your books, what is expensed and is depreciated, truck expenses, etc.
BTW, I read that in some states there is a great advantage to have a sub-contractor split out any material cost as it affects how you are treated in worker comp and liability insurace rates.
Thanks for the advice Bill, Schellingm, Jeff... I really appreciate the response. This is great since my expectations were pretty low...didn't think I'd get a response to these questions.
Hadn't thought of the obvious (IRS.gov - Pubs 334, 535...) I'll check the link/pubs. Not exactly the kind of "pub" I want to spend too much time in though so we'll probably end up renting some time from an accountant per your suggestion.
My wife is pretty sharp when it comes to accounting (Finance MBA), but that is not what she does on a regular basis so we'll have to find an accountant that know a little bit about general contracting/construction. Seems the construction biz is a little different than retail or manufacturing.
Thanks again. Hope I can return the favor some time.
Mike (Madhammer) Watterson
you said something I forgot ...
find an accountant that's well versed in small biz at the very least ... and contracting would be preferable ...
I picked my first accountant outta the yellow pages as his ad said "contractor specialist" ... never did figure what he meant by that ... maybe specialized in luring in contractors like me?
After a year and a half me me doing all the sifting/sorting/filing for him ... and getting back just about the same as the wife was figuring thru turbo tax ... I dumped him and went back to her running everything thru turbo tax.
That worked OK ... till I decided to get serious .... got a referal from a good friend ...he's a small time autobody/mechanic shop ... much worse than I am about paper work/reciepts/invoices ... works 99% of the time on a cash basis ... figured if his guy could keep him outta tax jail ... he'd do just fine for me!
The wife .. who loved her turbo tax program ... was a bit apprehensive ... didn't wanna give up that control ... came to the point where I said the guy could just do my biz stuff .. she could file the personal stuff ... I actually brought her to the first and follow up meeting with the guy .... she knew way more good Q's to ask ...
In the end .... that first year he did all of our taxes ... just made more sense to file jointly ...
This year ... all she said was ... I have all my tax stuff ready ... Call the accountant so we can get it to him quick.
Even she likes the idea of having a pro worry about all the loopholes and responsibilities.
If your wife is into it too ... I'd suggest have her grill the potentials with you.
Jeff
Buck Construction Pittsburgh,PA
Artistry in Carpentry
Thanks again Jeff,
You Pittsburg guys sure are a friendly bunch. I have an old college buddy that lives in Carnegie and runs a company called Gorilla Construction. He's not a "breaktimer" (his typing skill are very limited) but he always there if I need him for advice. Not sure he could help me on this one though (he shoots from the hip when it comes to business) so I'm glad you jumped in.
Mike Watterson, General Contractor "Home Improvement Solutions"
Lancaster, MA
I see his van all the time.
maybe I'll stop him in the parking lot next time ....
introduce myself.
In the mean time tell him I said hi.
BTW .... I'm just making this biz stuff up as I go ...
I'd suggest doing like I do ... double check my answers!
Hey ... tell your buddy I got the best accountant in Pittsburgh ....
he's always hustling new business ... drop me an email if he needs hooked up.
JeffBuck Construction Pittsburgh,PA
Artistry in Carpentry
I would second Bill Hartman's advice on getting some professional advice on setting up your books and on filing your return. If this is done once, you can do it yourself until your business changes dramatically.
To answer your questions:
1- We place subcontrator costs under Cost of Goods-Other
2- We put all costs, materials and labor under this category.
3- We only give 1099's to subs who only provide labor. This may not be the correct procedure. Check with an accountant. We have never received a 1099 from a customer(including commercial accounts) in over 20 years.
Disclaimer: I am not an accountant. But I did take some courses that were helpful, and I think I can answer your questions.
Remember that Schedule C is used by businesses of all types, including manufacturing, service, and others. It is also used by companies with and without direct employees.
Report subs on Schedule C, contract labor. That's what you are subbing them for, right? The law states that you have to 1099 any individual you paid $600 or more for goods and services, but it is a good idea to 1099 ANYbody you paid anything to.
COGS - Labor: This would be the cost of any employees you had producing the product. (in manufacturing, workers on the floor would be COGS labor, but engineering, salesmen, and secretaries would be SG&A, sales and general administrative expenses)
COGS - Material: this would be the cost of materials you purchased and put into the projects. Drywall, lumber, nails, etc Don't include tools or any other capital expense here.
COGS - Other: a place for stuff if you haven't put it on another lines somewheres else
If you pay the subs for both material and labor, include all the amounts (including labor and materials) in the 1099, and report it under contract labor.
If labor is split, do you issue a 1099 for every subcontractor you use?
Not quite sure what you mean here. If you hire a sub, who has 3 guys working for him, you only 1099 the sub. HE has to 1099 (or W2 if they are his employees) the 3 guys. If you pay each indiviudually, then in essence you have 4 subs, instead of one sub with 3 workers. Hope that makes sense.
Also, keep in mind that these are for TAX PURPOSES. If you want to keep accounting records of your own type, like splitting out materials that the subs are buying and putting it in the total materials costs for your own business records, that is perfectly legit, and legal. But you must report it to Uncle Sam the way he wants you to.
Hope this was helpful. I do have a CPA in the family who has provided me with much of the same help in the past. Good luck
Pete Duffy, Handyman
my only advice ...
find a good accountant.
They'll save ya more than they cost ya ...
plus .... it's pretty much hands off and worry free.
get a shark that'll find every legit deduction there is ...
we didn't write the tax laws ... we can only take full advantage of them!
My goal is to stay 100% legal ... and pay as little as possible.
Only a qualified accountant can do that for me.
Makes life lots easier.
Jeff
Buck Construction Pittsburgh,PA
Artistry in Carpentry